Audit Model and sampling
| Table | ||
| Issue case | Financial Assertions | Risk |
| 1 | Existence/ Valuation | Under/ Overstated stock |
| 2 | Accuracy | Misstatement |
| 3 | Rights/ Obligations | Legal matters |
| 4 | Completeness/ cat off | Understated/overstated (valuation problem) |
| 5 | Accuracy | |
Under the stock take inventory, auditor is entitled to take the stock count because the company management does have the tendency of overstating or understating the stocks of the company in order to lure the investors into their companies. Therefore the auditor has to take the physical account of the stock. The subsequent payment test is used to measure the accuracy of the account payable if there is a misstatement in that given account. The accuracy of the account payable is what the auditor is concerned to know in this given issue. As an auditor, the supporting document is what the auditor relies on for audit purpose.
If the legal contract has no documents to support it then auditor will have no duty to audit such documents. The details which are missing is a prove that sales invoice could be understated o overstated, the missing documents speaks a lot to the auditor general and therefore when the sale invoice is being audited then it’s advisable to have full discloser and for that reason the missing documents would results to underestimation or overestimation of the business. (Whittington, R., & Delaney, P. R. (2010). In that case the accuracy of the data is needed mostly for transparency to prevail. The letter needed elements of accuracy in order to get approved based on the scenario which has disrupted everything.
Issue number |
Audit opinion |
explanation |
| 1 | disclaimer | Reason being the pay back is not a legally distribute fund by an organization but it affects salaries and the amount should be taken back to employees. |
| 2 | Adverse opinion | The inflation of the materials being purchased here could be the case. That is why as an audit the adverse opinion works. |
| 3 | Disclaimer | Investigation have been done and concluded and therefore the auditor can only disclaim but not give any other opinion here. |
| 4 | Adverse opinion | The error has a different of 75%, this percentage is so big that it can influence the decision of the users opinion. People can see the company being a good one in terms of profit making however that is not a true figure. |
| 5 | Issue qualified | The non discloser in itself doesn’t affect the financial statement but it materials. The company management are entitled to give full disclose even though it will not affect any figure here but it is good for the transparency. |
In an event that the payback has been done in the company then it automatically suggest that the employee’s salary will be affected which is against the legal right. If the audit notices such an act in the company then it is automatically that the act is not right and for that the auditor will have to advice the organization to claim for the fund and pay workers what their dues are in a right manner and for that reason the auditor’s opinion will be disclaimer.
Being that the purchase arrived later after the organization has given their financial report on June, the information which the company gave contradicted the actual information because the shipment had already been done but financial report didn’t reflect it. The report misrepresented the actual report that was expected and for that reason an auditor could has given an adverse opinion. According to accounting principle, the money incurred for shipment is an expense and should be reflected in the financial report for the purpose of transparency.
In an event that an auditor detect that the calculation was not done correctly in the organization, then it tell that there was mistaken or something was not well recorded in the books of the account. (Tracy, J. A., & Barrow, C. (2008). Alternatively someone did an omission in the books of the accounts. In this case the auditor will call for disclaimer to make things right.
If the company financial report states that revenue increased by 80% while the actual increase of the revenue is 5% then it means that the company overstated their financial report in order to lure investors. As an auditor it’s therefore important to give an adverse opinion. Meaning that financial state of the company has been overstated by 75% but this doesn’t reflect the accurate financial position of the organization. Therefore, the company should change this to reflect their actual financial state.
Even though none discloser in this case doesn’t affect financial report but for the sake of transparency, organizational management is required to disclose all the financial reports. This could be healthful to the users of the same report. This call for the auditor to issue a qualified opinion to ensure that management of the company issues qualified reports and issue a full financial report discloser.
Risk Explanation |
Increase/ Decrease in the Sample size |
||
| 1 | Increase in inherent risk | Increase the sample size to test more | |
| 2 | Credit sales | Decrease the sample size there could be death of a major debtor/bankruptcy) | |
| 3 | Verification/ Inspection | Increase the sample size | |
| 4 | Stock tacking should be improved | Increase the sample size to capture more in inventory damage | |
| 5 | Cash count and do it frequency | Work with a greater sample size or choose sample population | |
In this case the auditor had a responsibility of giving out his views on how he/she can help the company to mitigate the risk which was highly anticipated. In the case of the increase of inherent risks, the company is advised to increase the sample size to curb the inherent risk for an organization to survive in such an environment. If the organization is selling g on credit then it means the organization might run out of capital before the debtors remit their payments and therefore the company is advised to reduce the sample size so that they remain with the size which they can maintain. (Whittington, R., & Delaney, P. R. (2010).
The major debtors can die or go bankruptcy and that can lead to down fall of the company. If the verification of the risk is factored then it all depends with the outcome of the risk. In this case the company is advised to their sample size for sales purposes. If the stock tackling has been improved if the auditor has noted so. Hence the sample size of the company should be increased as well based on auditor’s report. In an event that account receivables have been recorded law then its automatically that the financial report will be affected and that will affect the revenue of an organization. In this case the company is advised to cash out frequently. This can be achieved if the company has decided to work with high population or the selected population.
References
Tracy, J. A., & Barrow, C. (2008). Understanding business accounting for dummies. Chichester, England
Madray, J. R. (2006). Ocboa guide, 2007. Place of publication not identified:
Whittington, R. (2016). Wiley CPAexcel exam review study guide.
Whittington, R., & Delaney, P. R. (2010). Wiley CPA exam review 2011. Hoboken, N.J: John Wiley & Sons
Gupta, K. (2005). Contemporary auditing. New Delhi: Tata McGraw-Hill.
Delaney, P. R., & Whittington, R. (2009). Wiley CPA exam review 2010. Hoboken, N.J: Wiley
Delaney, P. R., & Whittington, O. R. (2007). Wiley CPA Exam Review 2007-2008: Problems and Solutions
